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Do the Best Hedge Funds Hedge?

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  • Sheridan Titman
  • Cristian Tiu

Abstract

We provide a simple argument that suggests that better-informed hedge funds choose to have less exposure to factor risk. Consistent with this argument, we find that hedge funds that exhibit lower R-squareds with respect to systematic factors have higher Sharpe ratios, higher information ratios, and higher alphas. They also exhibit higher manipulation-proof performance measures and charge higher fees. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Suggested Citation

  • Sheridan Titman & Cristian Tiu, 2011. "Do the Best Hedge Funds Hedge?," The Review of Financial Studies, Society for Financial Studies, vol. 24(1), pages 123-168.
    • Handle: RePEc:oup:rfinst:v:24:y:2011:i:1:p:123-168
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    File URL: http://hdl.handle.net/10.1093/rfs/hhq105
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